What Wienkes Wants Before He Will Be Positive

I fully realize that many satellite radio sector followers are not appreciative of the opinion of Mark Wienkes of Goldman Sachs. Whether you like his opinion or not, at this point, it is important to know what it is. As we all know Wienkes issued a report in which he lowered his price target on SIRI to $1. What he also included in that report were the items that he wants to see prior to becoming positive on the stock. I will break down the items point by point, and interject my opinion. Because the forums have limited space in each post, this piece may take more than one post.

FIRST - The Wienkes List:

"We are waiting on a preponderance of the following items before considering turning positive on the stock:"

sustained cost constraint as shown by Sirius in 2Q08;

more tangible visibility into the OEM ramp with steady integrated conversion rates and stable churn;

positive or stable and sustained ARPU momentum;

improving retail sales;

a significantly lower enterprise valuation;

reduced risk of dilution related to cash flow and refinancing needs through 2009;

Point #1, and Point #2

Wienkes wants sustained cost constraint as shown by Sirius in 2Q08;

Sirius and XM as separate companies have been demonstrating constraint in costs for quite some time now. This is nothing new to these equities. Cash burn has slowed, and costs of gaining subscribers has been improving. How much more "sustained" does Wienkes want?

With a merged company, it is obvious that the business will scale in certain ares in a short time frame. Marketing is perhaps the most obvious, but other items will show savings as well. Sales teams that work with retailers. Shelf space, and advertising will all show savings right out of the box.

Anyone can go through the last year of quarterly reports for both companies and witness evidence of cost cutting for themselves. I find it curious that Wienkes mentions this knowing full well that the companies have not only been cutting costs as stand alones, but will be even more efficient at it as a merged entity.

Again, where is Wienkes coming from? Has he looked at the gross OEM numbers over the past few years? Has he visited dealer lots and seen all of the SDARS equipped cars? Tangible visibility into the OEM Ram Up? What do you call record installations DESPITE a slow 12% down in vehicle sales? How much more tangible can it get? Didn't Wienkes see the JD power survey on 2008 model year penetration at 55%, up from 39% in the 2007 model year? That is a 41% jump!!!! Isn't that tangible?

Steady integrated conversion rates? Again, where is Wienkes coming from? XM's penetration rate was 53% up from 50% just a couple of quarters ago. XM has been between 50% and 55% for YEARS! Sirius announced 48% and guided higher. The company guided to 50% as a combined entity. Does Wienkes think that because the companies merged that things will change dramatically to the down side? Does he feel that having lower price point options for consumers will make the conversion rate go down? This baffles me.

Stable Churn? I hate to say it again, but what is Wienkes thinking? Churn has been stable. Self pay churn has typically been between 1.6% and 1.8% for quite some time now. How much more stable does it get? In his note, Wienkes cited that fully loaded churn for Sirius was at 2.8%, up from 2.1% a year ago. WHERE HAS THIS GUY BEEN? anyone who follows the sector is well aware that the OEM channel in Sirius had a substantial ramp up of 1 year subscriptions that at some point had to turn into some churn. The jump was reflected in Q3 of last year and has been pretty stable ever since. Doesn't Wienkes comprehend that an initial ramp up would boost sub numbers when it happened, and then boost churn when the promotional period ended? Perhaps the lack of understanding of the take rate is simply translating to a lack of understanding on the churn rate.

This whole point by Wienkes is shocking. It is almost as if he is a couple of years behind on the learning curve with respect to how the OEM channel works, and how churn is calculated.

Point #3 and Point #4

Wienkes wants positive or stable and sustained ARPU momentum;

I don't know where to start here. First of all, ARPU has been stable with both companies for quite some time. From time to time their are impacts to the line item, but typically they are one time events.

What is baffling is that the ARPU model will shift with a merged company. Not because they merged, but because there are now more pricing options. What is better, 70 subscribers paying $8 or 50 subscribers paying $10? Did Wienkes even stop to think that the ARPU line stands for average revenue per user, and that having a lower ARPU combined with deeper consumer demand can be better than a higher ARPU with less demand?

How long does Wienkes need to determine stability? One quarter, or twenty? Given that he is looking for stability in churn when it has been stable for YEARS makes me wonder if Wienkes will ever see stability!

Wienkes wants improving retail sales;

We all do. However, most people noticed a shift to OEM some time ago. Retail sales were important in the beginning because satellite radios were not available in cars. Most people understood this. If your car comes with satellite radio, do you really need to install a retail radio? Isn't the point to get the subscriber whether from the OEM channel or the retail channel?

Retail sales have stabilized, and have actually been ABOVE what most analysts were expecting. By the way, why is it that Wienkes does not put his targets out there for all of these metrics? He says he wants "something", but because no one knows what his "something" is, it may well be that he will never be satisfied.

Retail is going to be a Q4 event in SDARS going forward....at least for a while. Everyone knows this, so why is this metric important to Wienkes as a standard for becoming positive?

Initially, I agreed with Winkes. I knew it was going to get worse before it got better, just didnt think it would be THIS bad. My issue with his latest report is the same as Tyler's. Each of his bullet points have been answered already. He could have clarified that he was waiting to see the combined numbers and guidance, or what ever. But issuing a downgrade and dropping your price nearly 50% on this past quarterly earnings report? I thought the report was pretty damn positive myself.

I do not see a need for dilution at this point. The company is demonstrating cost control, and revenue is GETTING TO THE BOTTOM LINE. The company is still seeing TOP LINE GROWTH, and now we are beginning to see both TOP AND BOTTOM LINE growth. This is a positive trend.

I do not see financing as a major issue going forward. The markets will improve, and the company will be demonstrating better cash flows by the time they need to address the issue.

Point #7 and Point #8

Excuse me? You want all of your peers to adjust down to you, and then you will become more bullish? Come on now! Consensus gives the average of the opinions. That is why it is called consensus. This statement by Wienkes seems to carry an arrogance to it. Again, where is Wienkes desired goal? He does not offer it. We may know his opinion, but how much is he looking for others to cut? 10%? 30%? He is once again putting up a hoop for everyone to jump through, but also has the ability to move that hoop.

Wienkes wants clarity on the timing and magnitude of proposed merger synergies

We all want clarity. We all know there will be synergies. We all would love to see some of the steps to realize $400 million in the first year. We also all know that when Mel Karmazin sets a goal in public, he gets there. As an analyst, you do not need Mel to hold your pencil for you. Some savings are quite obvious, others less so.

We are all frustrated with the fact that knowing exactly how things are going to happen is not going to be an option, but we will all also be happy when the company gets there.

Conclusion

People are being critical of Mel Karmazin for not giving up detail and specific timetables. Perhaps we can all be critical of Wienkes for the same thing.

Wienkes has made several GENERAL statements without letting us know what his desires are. Does this give Wienkes the ability to create a moving target? YES IT DOES.

The man is negative on SDARS, and says that is is possible for him to be positive, but gives no REAL indication of what exactly it is that will satisfy him. While other analysts point out their assumptions in various metrics, I find that information lacking in Wienkes keys to turning positive.

In the end, it is the bottom line that matters. Not Wienkes bottom line, but the bottom line of the company

It is clearly apparent Weinkes is performing an intentional hatchet job on Sirius. What needs to be answered is why? Who's payroll is he on? What are his motives? What is Goldman Sachs CEO's part in this attack? Weinkes pen is causing one of the most direct take downs of a company's stock price that I have ever seen in the 25+ years I have been trading stock. Perhaps, Mel's appearance on Monday's CNBC Mad Money will reveal some of these answers. Remember, Cramer is a Goldman tool.

Tyler, Weinkes, will never be positive on the stock he proves this when he says, "improving retail sales". I got news for him it will not happen. I have also said basically the same thing. That if you already have it in your car there is no need to get it from a retailer to put it in your car. To be honest, I cant believe they have been as good as they have been with penitration rates getting to where they are.